Botswana Economic Outlook

Economic performance and outlook

Botswana continued to recover from setback in 2015, when the economy contracted 1.7% due to weak demand for diamond exports, severe drought, and persistent electricity and water supply shortages. Real GDP growth increased from 4.3% in 2016 to an estimated 4.5% in 2017, driven largely by broad-based expansion in nonmining activities, notably water and electricity; trade, hotels, and restaurants; transport and communication; and construction. The nonmining sector’s buoyancy was underpinned by improvements in the diamond trade and the continuation of countercyclical policies. Although diamond prices gradually rebounded, mining output contracted again, albeit less than in 2016. Extraction and processing of diamonds for export remain Botswana’s main growth driver.

Macroeconomic evolution

Inflation was estimated at 2.8% in 2016, outside the medium-term objective range of 3%–6%, due to low domestic demand and a modest increase in foreign prices. Monetary policy continues to take advantage of the prevailing low inflation rate. Authorities reduced the policy rate by 50 basis points to 5% in October 2017 to support domestic growth. The budget balance swung from three years of surpluses to a deficit in 2016 and back to a modest surplus in 2017. A modest budget deficit is projected for 2018, reflecting lower mining revenues, reduced revenues from the Southern African Customs Union (SACU), and higher spending associated with the economic stimulus program. Return to a surplus is projected in 2020. Public debt fell to 22.3% of GDP in 2017 and remains well below the statutory ceiling of 40%. The current account had an estimated surplus of 12% of GDP in 2017; international reserve coverage stood at 17 months of imports at end of 2016.

Tailwinds

The economy is projected to see a sustained pickup in the medium term, with real GDP growth projected to rise to nearly 5% in 2018. The good performance in nonmining and the continued recovery in mining are expected to support growth. Although mineral exports are likely to continue to rebound gradually, growth in nonmining is driven largely by service-oriented sectors, notably trade, hotels and restaurants, and transport and communications, supported by accommodative fiscal and monetary policies. The continued expansion of construction, associated with the economic stimulus program and planned upgrades of electricity and water infrastructure, is expected to further boost growth. Manufacturing will recover moderately, benefiting from improvements in electricity generation and water supply. The performance of these sectors will outweigh the sluggish performance in agriculture. Despite good weather, agricultural output will remain subdued as crop production continues to be hampered by traditional farming methods, erosion, and disease.

Headwinds

Downside risks to the positive medium-term outlook remain elevated. The dependence on diamonds for export and growth makes Botswana extremely vulnerable to external shocks. Key risks include the sluggish recovery of the global economy and uncertainty surrounding global trade and openness, which could reduce export earnings. The underwhelming economic conditions in South Africa could adversely affect SACU receipts, and adverse weather could further weaken agricultural growth and lead to water supply challenges. Delays in construction projects in electricity and water and a slow pace of structural reforms are also downside risks and underscore the need to resolve the energy and water crises and accelerate structural reforms—including reforms to reduce skill mismatches to facilitate economic diversification and increase productivity. Accomplishing these initiatives will promote economic transformation and enhance the resilience of medium-term growth prospects.